Friday, July 17, 2009

China Adds to Treasury Pile, With Bias to Short End

By MIN ZENG
China lifted its Treasury holdings by $38 billion in May to a total $801.5 billion, cementing its stronghold as the U.S.'s biggest creditor and increasing its importance for U.S. policy makers.
Still, improved risk appetite in May prompted foreign investors to sell long-dated U.S. Treasurys, which investors often turn to as a haven investment in times of uncertainty.
Overall, because of their buying of U.S. stocks, foreign investors bought $7.9 billion in long-term U.S. securities. U.S. investors bought $27.7 billion in foreign securities, for a net capital outflow from the U.S. of $19.8 billion in the long-term securities market, after net inflows of $11.5 billion in April, according to the monthly Treasury International Capital report released Thursday.
Foreign investors, who account for more than half of the Treasury market, sold $22.55 billion in Treasury notes and bonds in May, compared with net purchases of $41.89 billion the month before. U.S. corporate bonds, stocks and agency debt issued by the housing-finance giants Fannie Mae and Freddie Mac benefited from a move out of low-risk government debt.
Some central banks joined the move out of U.S. debt, with Japan and Russia cutting Treasury holdings in May. But China ramped up its purchases, posting the biggest one-month increase since last October. China now holds more than 20% of total Treasury holdings among foreign central banks and nearly matches the total amount Japan and Russia hold together.
Still, of the $38 billion increase in China's Treasury holdings in May, $34 billion went to short-term Treasury bills, noted Kathy Lien, director of currency research at Global Forex Trading in New York.
That change took place as the dollar lost 7.2% against the euro in May amid rising fears the U.S. government's aggressive fiscal and monetary policies could lead to a significant devaluation of the greenback, which would hurt the value of China's Treasury holdings.
"Although their reliance on the U.S. prevents them from aggressively selling dollars outright, their switch from long to short-dated securities is a precautionary measure in case they need to move money around," Ms. Lien said.
But the overall increase in holdings is good news for the U.S., which has to sell a record amount of government debt to cover its surging budget shortfalls. China's Treasury purchases also may help calm fears in the Treasury market of a sudden drop in demand.
It also underlines China's status as a major world power. "The more Treasurys China buys, the more it becomes a stakeholder," said Stephen Jen, managing director of macroeconomics and currencies at BlueGold Capital Management LLP in London. "They are like a shareholder in the U.S. and their voices have to be heard."
Tony Crescenzi, portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif., said the increase in China's purchase of Treasurys "almost certainly relates to its increase in foreign reserves," as these flows tend to be recycled back to dollar assets.
China's reserves have increased sharply as the economy rebounded strongly in the second quarter, standing at a record $2.13 trillion in June. The rebound, however, has been driven by the government's stimulus package, while the export sector continues to suffer from weak global demand. To support the export industry, Chinese policy makers would like to see a relatively weak yuan, hence the need to recycle foreign reserves into Treasurys.
The yuan has been relatively steady against the dollar, after appreciating more than 6% a year in 2007 and 2008.